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Welfare Effects of Privatizing Public Education When Human Capital Investments Are Risky

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  • Fabian Kindermann

Abstract

In an overlapping-generations model with risky human capital investment, borrowing constraints, and intergenerational transmission of abilities, I examine the effects of a change from publicly to privately funded college education. I find that from this reform, college graduates are better off compared to other workers since the college wage premium increases by around 50 percent. The reform deteriorates aggregate efficiency by (i) enforcing liquidity constraints, (ii) abolishing public insurance provision against educational risk, and (iii) increasing utility costs of college education via intergenerational spillovers. A success-dependent student loan system can offset efficiency losses but fails to generate efficiency gains.

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  • Fabian Kindermann, 2012. "Welfare Effects of Privatizing Public Education When Human Capital Investments Are Risky," Journal of Human Capital, University of Chicago Press, vol. 6(2), pages 87-123.
    • Handle: RePEc:ucp:jhucap:doi:10.1086/666524
    DOI: 10.1086/666524
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    Cited by:

    1. Alexander Ludwig & Dirk Krueger, 2015. "Optimal Capital and Progressive Labor Income Taxation with Endogenous Schooling Decisions and Intergenerational Transfers," 2015 Meeting Papers 334, Society for Economic Dynamics.
    2. Krueger, Dirk & Ludwig, Alexander, 2013. "On the Optimal Provision of Social Insurance," MEA discussion paper series 201302, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    3. Krueger, Dirk & Ludwig, Alexander, 2016. "On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 72-98.
    4. Alexander Ludwig & Dirk Krueger, 2010. "Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation," 2010 Meeting Papers 388, Society for Economic Dynamics.
    5. Ben J. Heijdra & Fabian Kindermann & Laurie S. M. Reijnders, 2014. "Life in Shackles? The Quantitative Implications of Reforming the Educational Loan System," CESifo Working Paper Series 5013, CESifo.

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